The leaders from eight of the world’s richest industrialized countries (commonly known as the “Group of Eight” or “G8”) – Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States – met in Deauville, France from May 27-28, 2011.  This forum, which traditionally discusses issues of mutual or global concern, was the 37^th formal G8 meeting since its founding in 1975.  Interestingly, at the conclusion of the meeting, the G8 leaders issued a joint final statement entitled: G8 Declaration Renewed Commitment for Freedom and Democracy. Among many other things, the G8 leaders’ 23-page, final statement called for better protection of intellectual property around the world.  More specifically, the following six paragraphs relating to IP were the most interesting:

• “In Deauville in 2011, for the first time at Leaders’ level, we agreed, in the presence of some leaders of the Internet economy, on a number of key principles, including freedom, respect for privacy and intellectual property, … that underpin a strong and flourishing Internet.”

• “The Internet has become a major driver for the global economy, its growth and innovation. The openness, transparency and freedom of the Internet have been key to its development and success. These principles, together with those of non-discrimination and fair competition, must continue to be an essential force behind its development. Their implementation must be included in a broader framework: that of respect for the rule of law, human rights and fundamental freedoms, the protection of intellectual property rights, which inspire life in every democratic society for the benefit of all citizens.”

• “The global digital economy has served as a powerful economic driver and engine of growth and innovation. … As we adopt more innovative Internet-based services, we face challenges in promoting interoperability and convergence among our public policies on issues such as the protection of personal data, net neutrality, transborder data flow, ICT security, and intellectual property.”

• “With regard to the protection of intellectual property, in particular copyright, trademarks, trade secrets and patents, we recognize the need to have national laws and frameworks for improved enforcement. We are thus renewing our commitment to ensuring effective action against violations of intellectual property rights in the digital arena, including action that addresses present and future infringements. We recognize that the effective implementation of intellectual property rules requires suitable international cooperation of relevant stakeholders, including with the private sector. We are committed to identifying ways of facilitating greater access and openness to knowledge, education and culture, including by encouraging continued innovation in legal on line trade in goods and content, that are respectful of intellectual property rights.”

• “We agree on the necessity of a level playing field in the innovation area, including a strong and robust intellectual property system as an incentive to innovation and a catalyst for growth. We acknowledge the important role of the World Intellectual Property Organization (WIPO) in developing a broad approach to intellectual property in support of business friendly, robust and efficient national intellectual property systems. Renewing our support to the principles of the patent system, we attach great importance to its promotion and development. We encourage increased international action to strengthen patent quality, and call for improved diffusion of patent information, particularly critical for SMEs and research centres. We support transparency in technology markets and call for the improvement of market places for trading rights. We invite WIPO, in close cooperation with Member States and other relevant entities, to intensify its work in these three areas. In addition we note the importance of enforcement in order to incentivise innovation and protect innovation once developed.”

• “We welcome the Patent Pool Initiative launched by UNITAID in order to facilitate the production of affordable generic medicines well-adapted for use in resource-poor settings, and we encourage the voluntary participation of patent owners, private and public, in the project.”

I was recently contacted by a world-renowned professor who was seeking advice about a piece of intellectually property (IP) he created, and that his university was profitably exploiting.  Who owned the IP?  Can he exploit it himself?  Was he entitled to share in the proceeds above and beyond his university (base) salary?  Not surprisingly, these questions are not rare.  After all, universities, colleges and research institutions are hot beds of creativity.  In 2008, U.S. universities and research institutions spent over $51.47B in R&D and received 3,280 issued U.S. patents, all while forming 595 new companies in IP “spin-outs.”[1] Further, total 2008 IP license income by U.S. universities and research institutions was over $3.4B.[2]

Given this setting, who then owns the IP created by someone within a university community?  Intuitively, the answer seems simple in the case of a tenured, research professor who develops IP related to their university research duties – the university owns it!  But how about the case of an undergraduate student who creates IP totally unrelated to any of her coursework!?  The student?  How about certain university community citizens in between these seemingly opposite ends of the spectrum such as university executives, administrators, (exempt or nonexempt) staff, graduate students, postdoctoral fellows, wage payroll employees, adjunct faculty, emeritus or retired faculty, visiting scholars and others?  The analysis for those university community citizens is often a fact-intensive endeavor.

In general, under varying applicable state and federal laws where the university employs the individual in question, there is a presumption that the employee owns the rights to their IP, even though it may have been created during the course of their employment.  This general rule, however, has two exceptions and one limitation.

• As to the first exception, if the employee has an express employment agreement, stating the contrary (i.e., an employee agreement assigning all IP to the employer/university), then the general rule does not apply.
• As to the second exception, if the employee was specifically “hired to invent,” later directed to solve a specific problem, or his employment requires that he exercise his “inventive faculties,” then the above-stated general rule also does not apply.
• As to the limitation, even when none of the two exceptions to the above-stated general rule apply, the employer – in the case of patented inventions – may have a non-exclusive, non-transferable, royalty-free license to practice the employee’s patented invention if it was made using the resources of the employer.  This is known as an employer’s “shop right.”

Now that we have the background legal theory out of the way, let’s discuss the reality.  That is, an overwhelming majority of universities have an “official intellectual property policy” that requires employees, as a condition to employment, to assign their IP rights under certain (if not, most) circumstances (e.g., when university funds or facilities are involved in the creation of the IP).  Thus, most situations fall under the above-stated first exception even though many professors and postdoctoral fellows fail to read such policies when they sign their employment agreements!

So what about the case of the undergraduate student who created IP totally unrelated to any of her coursework?  What if that IP was created without a professor’s help?  Well, in a recent reported case having those exact facts, a university’s lawyers demanded a 25% ownership stake and two-thirds of any profits from four undergraduate students who created a popular iPhone® application in their dorm room!  Although the university eventually backed down (after some bad press?), one campus technology transfer expert has observed that many universities “generally seek to retain ownership, or at least have a formalized mechanism for assessing ownership of a student’s work in much the same way they would regarding a faculty member’s work.”[3]

So, in sum, those working/learning/creating within a university community should become familiar with their university’s intellectual property policy at the start of their affiliation, and pay attention to the agreements they sign as a part of the new university employee “on-boarding” process. And, when potentially valuable new IP is created, be vigilant about asserting their rights in such IP.

Although the software business model taxonomy is neither perfect nor universal, most high-tech entrepreneurs recognize the existence of (and difference between) the “proprietary” and the “open source” software business models.[1]

The proprietary or “closed source” software model is one where a software program is distributed solely in object code form (i.e., only computer-readable form where the human-readable code is withheld) and legally protected by copyright, patent, trade secret and/or contract law (in the form of a restrictive license).  An enterprise participating in such a business model derives a majority of its revenue from licensing – as opposed to selling – software programs to users in the form of per-user or enterprise-wide fees.  This business model has been recognized as creating significant value for a firm because the intellectual property inherent in the programs remain under the control of the originating enterprise.

On the other hand, the open source software model is one where the source code of a software program is liberally licensed such that users have the right to view, change and improve the code’s design.  An enterprise participating in such a business model may license its software programs for free or for a nominal fee, but derives a majority of its revenues from selling complimentary goods and services such as servers, complimentary proprietary software programs, consulting and software customization services.  This business model has been recognized as promoting innovation due to the potential efforts of a large developer community.

Despite the philosophical clashes between these two models, the closed source and open source business models are not mutually exclusive.  That is, a high-tech enterprise need not make a black-or-white choice with respect to a particular program’s or the enterprise-wide’s distribution model.  There is a hybrid “mixed source” model where both open source and proprietary software code are combined in a single software program distribution.  In this business model, development costs and times may be reduced through the use of certain open source components in the single software program distribution.  Thus, an enterprise must decide which components of its product should be closed source versus open source (e.g., using open source for “commodity” components, using closed source for “differentiating” components and deciding on a case-by-case basis for “baseline” components).  [See Englefriet, IAM, pp. 37-41 (Aug./Sept. 2006), which discusses in-depth these choices and one commercially successful implementation.]  Of course, for such mixed source design to work and generate revenue in a predictable manner, an enterprise must manage the different open source licenses under which the utilized components were obtained, because the open source and closed source components may have complex interactions requiring intellectual property legal consultations at the early software design phase.

Another variety to the mixed source model is when an enterprise releases an open source version of its formerly proprietary program and then sells proprietary complimentary code along with the open source program.  This may be in addition to other proprietary products and services the enterprise offers.  Some observers point to Oracle’s 2009 acquisition of Sun Microsystems as a good example of an enterprise implementing a mixed source model.  Oracle’s proprietary database and middleware products can be sold and otherwise leveraged along with Sun Microsystem’s open source Java programming language and Solaris operating system.  [See Casadesus-Masanell et al., HBS Working Paper 10-022 (Sept. 2009), which provides an in-depth analysis of the mixed source business model and a framework for capturing value through its implementation.]  In such a mixed source business model, a profit-seeking enterprise needs to consider which of its software products should be open and which should remain proprietary.  That is, should the “core” software be open sourced or just the “extensions”?

In sum, the marketplace is filled with examples of profitable firms which have opted to implement one of the two above-described mixed source business models.  Such success will come, however, only after careful business planning given the product segment, and the relative levels of innovation and competition in the marketplace.  And, the careful business planning must include intellectual property legal consultation as early in the process as possible!

It is an obvious fact that the ability to raise capital is vital to many small (especially “high-tech”) businesses. In doing so, small business founders and other entrepreneurs spend a significant amount of time drafting a business plan and toiling with presentation slides. Those plans invariably define a market, describe the new service or product offering and detail the biographies of the management team. However, rarely do entrepreneurs think of stating their business case to potential investors in terms of the intellectual property (IP) rights (i.e., the patents, copyrights, trademarks and/or trade secrets) their new company controls or potentially can control.

Why should a small company care about IP?  Well, in the last thirty years, there has been a shift from a labor economy to a knowledge economy. That is, less than 10% of Americans now work in manufacturing. Consequently, intangible assets (i.e., long-lived assets used in the production of goods and services, including IP rights, know-how, software, databases, and certain contractual rights such as broadcast licenses, governmental permits, customer and supplier agreements, etc.) have emerged as the most powerful asset class, overtaking more traditional capital assets such as real property, plant and equipment. Studies have shown that as much as 75% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 30 years ago when less than 20 percent of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is IP.

So again, “What does IP have to do with me the small company entrepreneur raising capital!?”  Well, the lifeblood of any small, high-technology enterprise is the IP that it controls or potentially controls. In other words, the short-term salability, the long-term profitability, and the eventual ability to undertake an initial public offering of the small company all depend upon its ability to develop, acquire, protect and apply innovative ideas and concepts. The foregoing is supported by data showing that small businesses generate 13-14 times more patents per employee than large firms (and would empirically suggest that this tangible asset versus intangible asset inversion described above applies, if not more so, to smaller (and private) companies as well).

Thus, when an entrepreneur is spending a significant amount of time drafting a business plan and toiling with presentation slides in the hopes of raising capital, it would be prudent to ask: “What is my IP position and have I conveyed that in my materials such that a professional investor will understand?”  In other words, as an entrepreneur, you would not have started a company if you didn’t have a great idea about making some new product, offering a new service, or making some existing product or service faster, slower, cheaper, bigger, smaller or whatever adjective applies for describing the next “cool thing” in your technology space. Well, how do you keep competitors (think bigger, more-established companies) from just copying that idea!? The answer is IP rights!

Therefore, your business plan and pitch book should address the following:  What patent applications will we file?  What will we keep secret?  What will be open sourced?  What trademark applications will we file?  Have we obtained domain name registrations corresponding to the trademark applications we filed?  Does our business model depend on using someone else’s materials that are protected by copyright or some other form of IP?  Your plan and pitch books should address these because without any plan for establishing (or any established) IP rights, your venture essentially becomes a commodity provider attempting to compete on price – which is difficult given that you most likely won’t be able to take advantage of any economies of scale, unlike your more mature and larger competitors.

It is not uncommon for museums (or other artistic, non-profit and philanthropic organizations) to organize art exhibits which include works of art (e.g., paintings, sculptures, etc.) that are not owned by the museum itself.  In such cases, the museum curator must borrow the desired works from their owners (i.e., the artist themselves, other museums, corporations or private collectors).  In drafting a Loan Agreement between the exhibiting museums and owners to accomplish the foregoing, here are some general considerations:

1. The agreement should clearly specify the work(s) being borrowed by the museum, the loan period and the exact dates, times and places (i.e., one or more participating venues) the artwork may be exhibited.
2. The museum should reserve the right to include or not include specific works in one or more special exhibits. That is, the curator may want to maintain artistic control as to including or withdrawing one or more of the borrowed works from the exhibit at any time and in their sole discretion.
3. The agreement should specify in whose possession the borrowed works will remain during the duration of the loan period (i.e., the museum or one or more participating venues for a touring exhibit) and specify the logistics for the drop-off and pick-up of the borrowed works (including responsibility for the costs of such transportation and storage if pick-up times are missed).
4. The agreement should specify any indoor/outdoor exhibit conditions and requirements for the preservation of the borrowed works (e.g., limits or ranges of temperature, sunlight exposure, moisture, etc.).
5. The lending party should warrant that they have has full legal title and copyrights to the works being borrowed by the museum, and agree to indemnify the museum (and any participating venues) against any liability arising out of claims by persons claiming title or copyright to any of the works.
6. The agreement should specify who is responsible party (and in what amounts) for insuring the works against risks of physical loss or damage during the loan period.
7. The agreement should include a limited license for the museum and any participating venues to photograph and reproduce, display and transmit images of the works in connection with publicity of the exhibition and the right to use any contributing artist’s name, biographical information, likeness and credit line information in connection with such publicity.
8. The agreement should specify any monetary (or other) consideration being paid to the works’ owners for making the loan.  And, if the exhibition contemplates accepting offers for the sale of the borrowed works, the agreement should also specify sale prices and any commission arrangements.
9. The agreement should specify that the museum and any participating venues may apply conservation measures without the owner’s permission if immediate action is required to protect the works and how the costs of such conservation measures shall be shared and/or insured.

9. Invalid IP.  An IP-related agreement is, by definition, about IP rights in the form of exclusive rights to do certain acts or the right to exclude others from doing certain acts.  That is, after all, the whole point of IP rights.  Thus, when the parties negotiate an IP agreement, their expectations are based upon the ability to enforce such rights.  What happens, however, if the licensed IP rights are later found to be invalid by a court or government agency?  What happens when a potential IP right (e.g., a patent application) is licensed and it never materializes (e.g., the patent application never matures into an issued patent)?  Does that lead to an automatic termination of the agreement?  Or, does it simply lead to a reduction of the royalties?  If automatic termination, does that then lead to a refund of past royalties already paid?  In sum, the agreement should address what happens if the parties’ expectations with respect to the validity (or existence) of the licensed IP rights are not met.

10. Confidentiality.  Aside from the specific IP that is the subject of the agreement, the parties are likely to (purposefully or inadvertently) share confidential information during the course of performing under the agreement (e.g., future business plans, customer lists, pricing, etc.).  Thus, all IP-related agreements should contain provisions to address the treatment of the parties’ respective confidential information much like an Non-Disclosure (or Confidentiality) Agreement.

11. Assignment.  The agreement should spell out when, if at all, the parties can assign or transfer the agreement to another related or unrelated entity (e.g., only in the case of the sale of the entire business, only to an affiliate, etc.)?

12. General Provisions. These provisions, which some refer to as “miscellaneous” provisions, are found in every agreement (typically at the end) and often overlooked.  However, if (and when) a dispute arises with respect to the agreement, these provisions are far from unimportant.  The more notable general provisions include: (a) Governing Law – which state’s or jurisdiction’s law governs the agreement? (b) Dispute Resolution – how will disputes be resolved (e.g., arbitration, mediation or litigation)? (c) Venue – where will any dispute resolution proceedings take place (e.g., your company’s home jurisdiction, the other party’s or a neutral site)? (d) Survival – which provisions of the agreement survive the termination or expiration of the agreement such that the parties “walk-away” rights are clear (e.g., right to exhaust inventory of licensed products, return of confidential materials, indemnifications, etc.).

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

5. Obligations.  In order for the parties to be happy during the course of performance under the agreement, each party must tailor their behavior to conform to the other party’s expectations.  Thus, besides the transfer of IP rights, the agreement must clearly set forth the respective obligations of the parties so that no side becomes disappointed with the other side’s behavior.  Such expected behaviors include the obligation to: keep certain records, give written notice of certain events, prepare reports, obtain regulatory approval, purchase insurance, perform certain R&D, provide and update data, provide technical assistance, pay government fees such as taxes and IP-related maintenance, renewal and annuity fees, enforce the licensed IP rights against third-party infringers, mark products with certain IP-ownership notices, etc.

6. Dates.  It is important that the agreement clearly sets forth all dates (e.g., the effective date, expiration date, etc.) and time periods (with clear triggering events) for each party’s respective obligations (e.g., deadlines for making payments and delivering royalty reports, data, prototypes, etc.).

7. Newly-Created IP.  While the agreement should obviously specify the parties respective rights to existing IP, the allocation of rights to future IP that may be created during the course of performance under the agreement is often overlooked.  That is, the licensed IP may be modified, enhanced, improved and/or derivative works created therefrom by the licensor and/or the licensee.  Who owns such new IP?  Are they automatically included in the original license grant or does that trigger the need for additional compensation or negotiations?  Further – especially when such new IP is jointly created by the parties – who pays for and controls decisions regarding securing IP protection and who is responsible for enforcing such new IP?  Jointly owning newly-created IP sounds like a fair and simple solution to the issues raised by these questions.  However, what happens when the relationship sours (i.e., the agreement terminates) or runs its course (i.e., the agreement expires)?  The IP is still jointly owned and the parties’ fate with respect to licensing and enforcing the IP is still tied to each other.  Therefore, when negotiating the term sheet, don’t let the concentration on the existing IP that is driving the deal be accompanied by a neglect of future IP.  They both should be addressed, especially given the fact that newly-created IP can sometimes turn out to be more valuable than the IP existing at the time the agreement was first entered into.

8. Indemnifications.  If the licensee makes a product using the licensor’s IP which turns out to be defective, who’s responsible for any product liability or personal injury claims?  Does the answer change if the licensee modified the IP in the process of producing the defective product?  What if the licensed IP infringes a third party’s IP?  What if a third party sues because one of the parties to the agreement fails to perform one or more of its obligations?  The agreement must allocate these risks in terms of indemnifications (i.e., where one party holds the other party “harmless” and agrees to pay for all court costs, attorneys’ fees and judgments for certain types of claims).  Even if one party agrees to indemnify the other party, who controls the defense strategy and who decides when to settle?  Simply put, your agreement must address these questions.

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

1. Recitals.  Often overlooked and underdeveloped, the recitals (i.e., the “Whereas” statements that begin most agreements) should “set the stage” for a third-party reader of the agreement.  Generally speaking, in a later dispute, the recitals are presumed to be true statements held against both parties.  Thus, the recitals should tell the story about how the parties got here.  They should reference what technology, funding, personnel and/or other resources and capabilities each party brings to the table.  The recitals should also reference any other agreements between the parties (e.g., an earlier confidentiality or funding agreement) which are now amended or rendered void.

2. Definitions.  There is no more important task in drafting an agreement than defining the (capitalized) terms which will be used throughout the agreement.  That is, the definition section is the skeleton of the agreement upon which the business terms and conditions of the term sheet can be fleshed out.  Thus, such terms as “Licensed Product,” “Field,” “Licensed Services,” “Net Revenue,” “Territory,” “Licensed IP,” “New IP,” “License,” “Party A’s IP” and “Party B’s IP” must be precisely and accurately defined.  In sum, the definitions section, like the rest of the agreement as a whole, must strive for clarity and be the basis for each party’s (realistic) expectations of the other.

3. License Grants.The heart of any IP-related agreement is the precise description of exactly what IP is licensed to whom, under what conditions (e.g., only after regulatory approval or receiving a next round of financing), under what restrictions, for how long, for what purposes, exclusively or non-exclusively, and with or without sublicense rights.

4. Royalties.  The agreement must specify the type (and amount) of consideration for any IP license grants.  Such consideration can be monetary or non-monetary, and includes: a one-time fee, royalty payments based on net or gross revenue, options, access to licensee’s IP, development of complimentary IP, equity position, or any combination of these.  The refundability and any minimums with respect to royalties should also be specified.

At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship.  While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable.  The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.

]]> http://dcipattorney.com/2010/01/12-important-considerations-for-drafting-ip-license-agreements-part-1-of-3/feed/ 0 http://dcipattorney.com/2009/12/five-common-intellectual-property-related-mistakes-made-by-small-high-tech-companies-part-4-of-5/ http://dcipattorney.com/2009/12/five-common-intellectual-property-related-mistakes-made-by-small-high-tech-companies-part-4-of-5/#comments Tue, 15 Dec 2009 17:16:31 +0000 Raymond Millien http://dcipattorney.com/?p=82

No. 4: You Do Not Actually Own the Copyright to “Your” Source Code

No matter how much the phrase “work for hire” is thrown around in the tech world, let me be very clear: Software code CANNOT be a work for hire under U.S. copyright law.

That is, simply paying someone to write software code for you does not mean you own the copyright to the code!

In order to own the copyright to software code written by an independent contractor (i.e., a non-employee), you must have a written agreement assigning the copyright code to you. This is best done BEFORE the code is actually written.

As the old saying goes, I wish I had a dollar for every time I had to counsel an entrepreneur who hired a programmer to author code about the fact that they do not own the IP to the resulting work product for which they paid.

Although the U.S. government fee for filing a copyright registration ranges from only $35-$65, most people realize that original works of authorship, once fixed in any tangible medium, receives automatic worldwide protection.

That is, once the pen is lifted from the paper or the data is saved on your computer, it is copyrighted!

For evidentiary and other advantages, however, it is often suggested that certain works – especially works that will be released and widely-distributed – be forwarded to the U.S. Copyright Office, which is a division of the Library of Congress, for registration.

If the work’s character and use lends itself to actually needing to be registered, the process for most works is not nearly as complex as the patent application process, and much cheaper!